Will the U.K. Avoid Another Recession?

Every economy fears the big, bad R-word. But don’t worry about the U.K.! Economic gurus think that the British economy will avoid a recession… but only by a hairsbreadth! They anticipate GDP growth for Q1 2012 to come in at 0.1%, following the 0.3% contraction that we saw in the last quarter of 2011.

No one wants to see another contraction for the U.K. As I mentioned in an article I wrote last week, back-to-back quarters of negative growth would put it in a technical recession.

So what should we expect from this Wednesday’s GDP report?

Let’s start off with the good stuff that could drag GDP upwards.

For one, consumer spending has improved. In fact, retail sales rose at the fastest pace in more than a year in March. According to analysts, the warm weather spurred demand for clothes and helped the report print an increase of 1.8%, erasing the 0.8% contraction we saw in February.

There are also fewer unemployed Britons. Unemployment is down 35,000 in the three months to February. On top of that, the claimant count change report for March posted an upside surprise when it came in at 3,600 versus the 6,600 forecasts. Consequently, this brought the unemployment rate down from 8.4% in February to 8.3% in March.

Some market junkies feel that the Q1 2012 GDP will meet expectations, especially after analysts at the London-based consultancy NIESR did the math and came up with the same estimate of 0.1%.

However, before you get too excited, you should know that it’s not all good in the hood. There are also aspects in the economy that could drag the GDP lower.

First off, the construction sector contracted sharply in the first quarter. This is bad news because the sector accounts for 7.6% of the economy. If estimates are correct and the sector indeed declined by 5% last quarter, overall growth could suffer by as much as 0.4%.

There are also worries that the lagging manufacturing sector and tough austerity measures took their toll on growth last quarter.

The Q1 2012 GDP report is particularly important because of what’s at stake. If GDP growth falls into negative territory, not only would it spell a technical recession in the U.K., but it would probably kill any momentum the U.K. has managed to build.

Any optimism over the U.K. economy may be snuffed by a red GDP figure, and I imagine a huge blow would be dealt to both consumer and business confidence. It could promote a risk-averse mindset among Britons, which may undo recent improvements in consumer spending. After all, very few things scare people more than the idea of a double-dip recession!

Furthermore, a negative GDP figure may pressure the Bank of England to reconsider more quantitative easing (QE) in its future meetings, and as such, it would probably erase some of the British pound’s recent gains.

On the other hand, a positive GDP figure would save the U.K. from another recession. I think it would also serve as the nail in the coffin for more QE in the near future and would probably extend the pound’s recent rally.

But no matter what results come out, whether they turn out positive or negative, I suggest you take them with a grain of salt as the preliminary GDP report doesn’t always give an accurate assessment of the economy.

The preliminary estimate is only based on 40% of the total data that the Office for National Statistics collects, and it’s quite prone to revisions. As a matter of fact, since 1998, about a third of the preliminary estimates have been revised by as much as 0.5%!

Nevertheless, the upcoming release remains much anticipated as it’s expected to have a huge impact on the markets. I’m getting giddy just thinking about it! Don’t be surprised if you see MAJOR moves on the charts when the GDP report comes out on Wednesday (April 25, 2012) at 8:30 am GMT, folks!


  • C Hulstrand

    Great article!

  • Geo

    Is the UK doing better because of Olympics spending?

  • HarryPilgrim

    Thanks for this completely excellent review of the UK econ. I think the results will be positive because the Old Lady has seen them already and has turned hawkish.